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Tuesday, July 11, 2006

Genentech Pricing Action Ahead of Earnings

Genetech (DNA) is expected to post $0.47 EPS & revenues of $2.12 Billion. If you think Alcoa (AA) is a harbinger for metals and commodity stocks, then you have to view Genentech (DNA) as the first harbinger for biotech stocks in earnings season. Genetech (DNA) carries an $88 Billion market cap, even though Roche own 55.7% of those shares that are not part of the free float. The closest biotech is Amgen (AMGN) with a $78.5 Billion market cap, and they report on July 20.

Depending on Rituxan sales, DNA can have an impact on Biogen-Idec (BIIB) since they are partners on that drug, although there has not ever been a significant move in the stock $535-560M in either company based just on that drug.

While analysts are very mixed on various valuation models, you can still find analyst price targets north of the $100-mark.

Genentech has longer-term guidance out to 2010: It plans to present 20 new molecules to be introduced into trials, 15 new products or indications, an average non-GAAP earnings growth of 25%, and to achieve $12B in free cash flow. The company also has $6 Billion as of last quarter available for its total buyback plan through next year.

Assuming targets are met, this would mark what looks to be the 17th consecutive quarter of double-digit earnings growth for the company.

What is most important is trying to gauge earnings expectation outside of the estimates. Options traders appear braced for a $2.00 move either way, although it looks like they can absorb a $3.00 move in either direction based on how the stock has been acting. The chart showed it recovering earlier over the last month when it based out, but the shares failed to get back above and stay over its 200 day moving average and have been weak for the last three trading sessions.

These are now about to be one quarter old, but here are the multiples for key biotechs according to Yahoo! Finance.

Description Mkt-Cap P/E ROE %
Genentech $88.2B 64.014 19.0
Amgen $78.5B 21.609 20.9
Gilead Sci $28.03B 32.017 33.7
Celgene $16.6B 509.043 5.02
Biogen Idec $15.92B 66.318 3.4
Genzyme $15.28B 35.453 9.05
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